The Guardian and Private Equity

Careful readers will know that there has been a bit of a push from the Guardian and Observer newspapers on the subject of private equity. Horrible stuff apparently, shouldn't be allowed etc etc. Here's Will Hutton:

It is time to come to the defence of the public limited company, one of the great Enlightenment gifts to western civilisation. Increasingly capital, in the quest for higher returns to make vast personal fortunes, is going private to escape the demands of public accountability on stock markets. If uninterrupted, the long-term adverse consequences of this privatisation of capital for our economy, society and democracy will be profound.

Quite a strong statement there, don't you think?

One truth about private equity shines out: the extravagant management fees and annual "carry" (the share in profits) certainly means life-changing fortunes. Researchers at Manchester University's ESRC Centre for Socio-Cultural Change recently got hold of the internal management accounts of one fund with up to £8bn of funds under management. After five years 30 full partners expected to make between £25m and £50m each.

The rest of the industry's claims about creating jobs, investment and exports do not bear close scrutiny. Much of the alleged managerial alchemy is no more than old-fashioned financial engineering - that is, leveraging up returns by incurring lots of debt. One study by Citigroup showed that if pension funds and insurance firms had borrowed money themselves and invested in a basket of companies in which private equity groups invested, they would have made higher returns than even the best-performing private equity firms.

Terrible, terrible.

Mortgaging the future to capture gains for personal enrichment in the present is easy - as one chief executive of a well-known public company told me recently, the task of the good manager is to resist it. Managers have to balance the interests of today's shareholders with tomorrow's shareholders. Private equity drives a coach and horses through the proposition. And as Paul Myners, the former chairman of Marks & Spencer and chairman of Guardian Media Group, has remarked: "The one party that is not rewarded is the employees, who generally speaking suffer an erosion of job security and a loss of benefits."

It's the workers that suffer, oppressed by the grasping plutocrats you see.

This is not pro- but anti-wealth-creation. In this respect the attitude of private equity closely mimics that of the Chinese communist party. Both conceive of companies as networks of contracts between capital and labour that generate revenue streams to be manipulated by whoever has central control for personal or political advantage. Neither has any conception of companies as Enlightenment institutions that incorporate real-life human beings into a joint enterprise, in which being publicly scrutinised and held to account helps managers make better decisions. The foundation of a durable business, as James Collin and Jerry Porras argued in their famous book, Built to Last, requires vision, values, leadership and purpose around an organisation's "reason to be" - the antithesis of everything private equity stands for.

In fact, it's just like the Commies!

Pension funds and insurance companies are myopic and short-term enough, but because takeover is so easy in Britain private equity has been able to carry short-termism to new extremes. This is said to raise productivity and performance. I would argue the opposite. The chief reason British business remains at the bottom of the international league tables for innovation, research and development, and productivity growth is because of too much takeover and too much private equity. Innovation lowers short-term profits.

It's screwing the long term opportunities for the economy.

The answer is obvious. Private equity cannot be outlawed; in any case it can do a good job. Rather, the perverse incentives in Britain that favour takeover need to be removed. We need to defend the public company and create conditions in which it can prosper. But who is going to do that? Not the Conservative party, in thrall to private equity, and not, judging by its legislative record, the government. Our politicians are confused. There is more to wealth creation than constructing a plutocracy of private equity partners.

Well, he's not quite sure what to do about it but hopes that someone will somewhere. So, that was from The Guardian newspaper, February 23 2007. Here's a report from The Telegraph, March 7, 2007:

Guardian News & Media has raised the prospect of compulsory job cuts at the newspaper group as it becomes the latest media company to integrate its print and digital operations.

In a series of meetings with reporters, production and administration staff, the publisher of The Guardian, The Observer and the Guardian Unlimited website told employees that the group had to cut costs and modernise to progress.

Did you know that The Guardian was owned by private equity? So Will Hutton certainly looks to be correct on at least one of his observations, that the workers get screwed when there is no stock market oversight, no social conscience, no outside moral scrutiny.

In a move that threatens to put the company on a collision course with its unions, Mr Rusbridger also warned the move towards a digital future would involve re-examining the union house agreement with the paper's editorial staff that prevents compulsory redundancies and guarantees a nine-day working fortnight.

Yup, bash the unions alright.

The loss-making newspapers are bankrolled by the group's Trader Media wing, which publishes the Auto Trader car magazine and website. The group is looking to sell or float a minority stake in Trader Media to underwrite its future and is in talks with private equity groups Apax, Blackstone and Candover.

Surely not! Surely the group should be floated on the Stock Exchange so as to provide the public accountability so necessary?

One note. Guardian Media Group is owned by a charitable trust, the Scott Trust. Will Hutton is a trustee of the Scott Trust.

Are we allowed to call him a hypocrite yet?